When trading in the Foreign Exchange market, one technique might work very well for some traders while another might work better for others. This is especially true when it comes to approaches used in analyzing the market. What this simply means is that different approaches work in different ways for traders. It is all about selecting a style that suits one best. There are two main approaches used in Forex trading, namely the Technical Analysis and Fundamental Analysis. Learning about these two approaches is important in helping Forex traders decide which one of the two they are most comfortable using when trading.
This approach is centered on the numbers that are behind the Foreign Exchange Market behavior. Market behavior is studied using graphic tools, reports and market indicators that are used in predicting future trends of currency price. The analysis is based on three basic assumptions; price is a reflection of the overall stability of a currency, prices often move in trends and that history repeats itself. In Technical Analysis, the focus is mainly on the utilization of historical currency data in predicting the state of price movement in future trades. Using the data that is readily available to them, Forex traders are able to monitor trends and patterns which are important when making prudent trade decisions. Technical analysts have time and again underscored that the ability to identify trends from readily available data, and using them to secure the best trading opportunities, is the biggest determinant of success in the Foreign Exchange Market.
The Forex Fundamental Analysis mainly focuses on external forces that are known to directly affect price movement in the Foreign Exchange Market. In Fundamental Analysis, the well being of an entity is assessed without taking the price movements into account. Factors that are evaluated here include the likes of political, economic and social trends. Most fundamental analysts are of the opinion that events such as inflation, unemployment and economic growth in a country play a huge role in determining the currency movements observed in the Foreign Exchange Market. Additionally, these analysts also speculate that the shifting of values in the Foreign Exchange Market is not just a cyclic phenomenon, but believe that there is a raison d’être behind every trend.
So, Which Approach Is Better?
In comparing the two approaches, it is crucial for Forex traders to acknowledge that each technique has its own pros and cons. If one decides to use the Technical Analysis approach, they are assured of efficient objectivity when they are about to make crucial trade decisions. However, this would mean that the Forex trader now has to go through volumes upon volumes of data to find what they need. An advantage of the Fundamental analysis approach is that a Forex trader can spot all the improving fundamentals and become the first to enter the market before the general public gets to hear about it.
The most important point that traders have to remember is that regardless of the approach they decide to employ, their success in the Foreign Exchange Market will be determined by their use of sound judgment, taking appropriate risks and improving their trading skills.
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